Russell 2000 goes down fighting
The Russell 2000 (NYSE: IWM) fell but was the best performer among the major U.S. indices during a memorable session. The small-cap index fell 1.61 points, or 0.24%, to 671.57, its third consecutive decline. The Dow Jones Industrial Average (INDU) lost 128.11 points, or 1.06%, to 11,971.19.
On a year-to-date basis, the Russell 2000 has let go 12.33%, while the Dow has retreated 9.75% and the S&P 500 is missing 10.75%.
An extraordinary day of trading began with a steep drop despite news that the U.S. Federal Reserve decided to lower the target federal funds rate, the rate at which commercial banks make overnight loans to each other, to 3.5% from 4.25%.
That’s the biggest cut in more than 20 years and since the terrorist attacks in 2001 that the central bank is cutting interest rates between regularly scheduled meetings.
“The Fed acted today in part to offset negative sentiment and psychology,” said Stephen Wood, Senior Portfolio Strategist at the Russell Investments, the group behind the Russell 2000 index, in a phone interview. “I think there will be another cut on Jan. 30.”
The Fed is scheduled to conclude a two-day policy meeting on Jan. 30.
But stocks tumbled out of the gate despite news of the interest rate cut. Investors apparently got the jitters as fears of a U.S. economic recession spread globally, while more bad news came from the financial sector.
Bank of America Corp. (NYSE: BAC) reported that its fourth-quarter net income declined 95% to $0.05 per share from $1.16 per share a year earlier due to $5.28 billion in collateralized debt obligation write-downs.
Similarly, bond issuer Ambac Financial Group, Inc. (NYSE: ABK) reported that it swung to a fourth-quarter loss of $3.26 billion, or $31.85 per share, compared with a profit of $202.7 million, or $1.88 per share.
The Russell 2000 began the session down more than 3% but quickly trimmed those losses and spent the hours after 11 a.m. ET near the flat line, occasionally rising into positive territory.
Meanwhile, the other major U.S. indices languished deep in the red.
Concerns of a potential U.S. economic recession have recently spread globally, causing steep sell-offs in overseas stock markets and raising questions about the future of the domestic and global economy. On Jan. 17, the Russell 2000 became the first major U.S. index to officially enter a bear market.
“We are in a situation of extremely slow growth,” Wood said. “A classic recession with two quarters of negative growth strikes me as a lower probability situation, however we are clearly in an earnings recession.”
What does this mean for small-cap stocks?
“Credit markets and equity markets are in for a choppy year,” said Wood. “It’s going to be a challenging first half of the year, and I don’t think small caps will be spared.”
Small-cap investors, you’ve been warned.
Wood explained: “If the U.S. enters a recession and borrowing costs increase, that’s bad for small caps. Small caps are proportionately more exposed to U.S. economy than the larger caps.”
The economic and financial turbulence will last into the third quarter of 2008, predicted Wood.
Here are the day’s biggest percentage gainers and losers, along with top volume leaders, among companies with a market cap between $100 million and $750 million:• Allegiant Travel Co. (ALGT), up 21% to $25.50.
• Petmed Express, Inc. (PETS), up 21% to $13.28 on news of a rise in fiscal third-quarter profit.
• Sonesta International Hotels Corp. (SNSTA), up 19% to $27.25.
• Corinthian Colleges, Inc. (COCO), down 31% to $7.55 on news that three lenders will no longer make loans for subprime student borrowers.
• Twin Disc, Inc. (TWIN), down 27% to $16.36 on news of a decline in second-quarter earnings.
• BladeLogic, Inc. (BLOG), down 24% to $17.75.
• Corinthian Colleges, Inc. (COCO) 12,262,300 shares traded.
• The PMI Group, Inc. (PMI) 4,557,300 shares traded.
• Hovnanian Enterprises, Inc. (HOV) 4,130,600 shares traded.
The day saw 180 small-cap stocks set 52-week lows, while four small caps established a 52-week high.
Also see:
Small caps lose momentum (2:54 p.m.)
Defiant small caps rising (12:32 p.m.)
Russell 2000 somewhat recovers (11:41 a.m.)
Small caps declining (10:20 a.m.)
Russell 2000 falls sharply (9:01 a.m.)
